CNBC had a short segment on an possible option play heading into FB earnings (they featured a covered call spread I believe). It got me thinking about what kind of option plays I could do. I was thinking about a straddle (buy 28ish strike put, buy 35ish strike call).

To be honest, I don't have too much options experience, especially heading into earnings. Will a lot of other people be buying options too, causing vols/premiums to spike? Is there even a good play that can be made here or do you think it would be better to leave it alone?

baw703916 wrote:This is probably the wrong forum on which to ask this question.

FB has so many people following it that it's probably hard to find a mispricing, even more so than most companies.

It's probably hard to find a relative mispricing (i.e., inconsistent with put-call parity), but probably not so hard to find an absolute mispricing (i.e., both puts and calls overpriced by the same amount); implied volatility tends to be higher than historical (and realized) volatility.

creapure2 wrote:CNBC had a short segment on an possible option play heading into FB earnings (they featured a covered call spread I believe). It got me thinking about what kind of option plays I could do. I was thinking about a straddle (buy 28ish strike put, buy 35ish strike call).

To be honest, I don't have too much options experience, especially heading into earnings. Will a lot of other people be buying options too, causing vols/premiums to spike? Is there even a good play that can be made here or do you think it would be better to leave it alone?

Appreciate your thoughts!

I suggest not to make any investment or trading decisions by listening to CNBC. Most of the time, person recommending talk their positions.

28 put/ 35 call trade is a strangle, not a straddle. Straddle will have same strike for both put and call.

Option trading is all about probabilities. There is 20% probability FB will be in the money (at 28 or 35) from weekly option price. Trading on earnings is especially hard.

Yesterday FB closed at 31.54. Most of the option traders place bet on either on weekly option (FEB1 13) or monthly option (Feb2 13).

From the option prices, FB is priced to move +/- $3 after earnings. If the FB price closes at same price just before earnings as yesterday, your strangle will fall within that price move. One thing for certain on any option, which prices single event is volatility gets crushed. Current FB weekly option vol. of 92% will be in high 40's to low 50's after earnings report on the opening print.

Current strangle price for 28/35 weekly option strangle is 80 cents. If FB moves $3 as predicted by option prices, then your strangle will worth around 20 or 21 cents (accounting for 45% vol crush and $3 move), on Thursday opening after the earnings. To make money on your strangle, you need outsize move from the predicted price. Way outside moves can happen like yesterday on Netflix, then you will be very profitable. But on consistent basis, option markets tend to be correct.

Taking into account 80 cents paid for the strangle, your strategy will have 5% probability to become profitable

Edit: since you own both puts and calls your probabilities are double. So you have around 10% prob of being profitable and around 35to 40% being in the money

creapure2 wrote:CNBC had a short segment on an possible option play heading into FB earnings (they featured a covered call spread I believe). It got me thinking about what kind of option plays I could do. I was thinking about a straddle (buy 28ish strike put, buy 35ish strike call).

To be honest, I don't have too much options experience, especially heading into earnings. Will a lot of other people be buying options too, causing vols/premiums to spike? Is there even a good play that can be made here or do you think it would be better to leave it alone?

Appreciate your thoughts!

I suggest not to make any investment or trading decisions by listening to CNBC. Most of the time, person recommending talk their positions.

28 put/ 35 call trade is a strangle, not a straddle. Straddle will have same strike for both put and call.

Option trading is all about probabilities. There is 20% probability FB will be in the money (at 28 or 35) from weekly option price. Trading on earnings is especially hard.

Yesterday FB closed at 31.54. Most of the option traders place bet on either on weekly option (FEB1 13) or monthly option (Feb2 13).

From the option prices, FB is priced to move +/- $3 after earnings. If the FB price closes at same price just before earnings as yesterday, your strangle will fall within that price move. One thing for certain on any option, which prices single event is volatility gets crushed. Current FB weekly option vol. of 92% will be in high 40's to low 50's after earnings report on the opening print.

Current strangle price for 28/35 weekly option strangle is 80 cents. If FB moves $3 as predicted by option prices, then your strangle will worth around 20 or 21 cents (accounting for 45% vol crush and $3 move), on Thursday opening after the earnings. To make money on your strangle, you need outsize move from the predicted price. Way outside moves can happen like yesterday on Netflix, then you will be very profitable. But on consistent basis, option markets tend to be correct.

Taking into account 80 cents paid for the strangle, your strategy will have 5% probability to become profitable

Edit: since you own both puts and calls your probabilities are double. So you have around 10% prob of being profitable and around 35to 40% being in the money

First off, thanks very much for sharing your thoughts and knowledge on the topic. I definitely understand what you're saying about a +/- ~10% move already being expected/priced in via implied vol. That being said, if you look at NFLX's earnings events, every single time a strangle would have been hugely profitable (10-20x return). On the last FB earnings the stock jumped over 25% or so and a strangle would have been very profitable as well. So do you think the market is more or less undervaluing the affects of earnings on these highly volatile stocks? Of course FB could release earnings that are exactly in line with expectations and otherwise barely move the stock, but I don't think this will happen and I do think there is a good option play here... just trying to figure out which one exactly! Would it be better to trade a slightly longer dated option?

creapure2 wrote:
First off, thanks very much for sharing your thoughts and knowledge on the topic. I definitely understand what you're saying about a +/- ~10% move already being expected/priced in via implied vol. That being said, if you look at NFLX's earnings events, every single time a strangle would have been hugely profitable (10-20x return). On the last FB earnings the stock jumped over 25% or so and a strangle would have been very profitable as well. So do you think the market is more or less undervaluing the affects of earnings on these highly volatile stocks? Of course FB could release earnings that are exactly in line with expectations and otherwise barely move the stock, but I don't think this will happen and I do think there is a good option play here... just trying to figure out which one exactly! Would it be better to trade a slightly longer dated option?

From your response, you may not be new to this option thing after all. Nothing more worse then listening to CNBC, is listening to trade advise on anonymous internet forum.

But be as it may be, you need to think single trade with respect to your portfolio. If your trading portfolio is short vol, then this long vol. play will fit right in. Also, keep the trade size small. You seem to believe in big price movement for this stock, then your strategy is fine, just go with longer duration, in this case may be March (49% vol)

I trade mostly index options and some stocks like AAPL, GOOG and IBM which has a big influence on indices. If i were to trade FB, and expect long price movement then I would go long March 31/32 strangle and short Feb1 or Feb2 26/37 weekly strangle. This reduces cost basis little bit. You are shorting high vol, and long on low vol with 47 days to which also helps.

I don't like to pay up for long vol. I am mostly short delta, short gamma trader (sorry Taleb). Entire trade is an strangle swap or double calender, so can be an executed as an single trade.

Good luck

Edit: I also would like to place trade closer to end of the expiration day, so that you center the strangle swap price to the closing price. If you place trade day or two earlier then the strangle swap price will be skewed

Another strategy you may want to consider is selling the Sept. 25 put. You immediately get a ~$1.50 credit/contract (stop @ $2.50 GTC, thus limiting a possible loss). You'll either keep the premium come Sept. buy FB @ $23.50 net or perhaps get stopped-out along the way.

Any idea that comes from CNBC is automatically terrible, sorry. Stay far away.

The people on the channel are border line brain dead and only make money from being on TV. Occasionally a person who actually makes money in real life will appear on that channel. They do so only for marketing reasons to sell their services to the brain dead people who watch the channel.

CNBC is a complete joke. I really believe an angel dies every time it's mentioned here.